Online betting markets, digital taxes and asset pricing

Title: Online betting markets, digital taxes and asset pricing

Abstract: Using a novel data set on betting odds from 55 international betting agencies for more than 100,000 sports events between 2009 and 2018, this paper studies the effects of the introduction of the German (digital) betting tax in July 2012 on prices in online sports betting markets. The tax is levied on betting revenues generated by German customers and has to be paid by betting agencies irrespective of their jurisdictional location. This setup provides a promising natural experiment to test theories of asset pricing anomalies and learn more about price mechanisms in digital markets and the functioning of digital taxes. I find that the vast majority of betting agencies that target the German market paid the tax despite a missing jurisdiction in Germany. Bettors bear almost the entire burden of the tax. However, the tax incidence is heterogeneous conditional on different endogenous pass-through policies set by the agencies. In addition, I document a favorite-longshot bias (FLB) in the data set -- a well-established empirical fact in horse racetrack betting, where favorites are underbet, and longshots are overbet. The tax increases the degree of the FLB, which has important implications for the role of taxes for financial market efficiency.